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As more and more private investors are getting involved in microfinance, the sector is experiencing an investment boom. Between 2004 and 2006, the stock of foreign capital investment in microfinance institutions more than tripled to reach US$4billion. So far, the vast bulk of private investment in microfinance is socially motivated, says this Focus Note, written by Xavier Reille and Sarah Forster.
Despite a sound regulatory framework for microfinance and significant injections of donor funding estimated at close to US$ 400 million over the past five years, there is a lack of strong, sustainable institutions in Pakistan able to reach the scale necessary to have significant impact. However, today, heightened interest on the part of government and several new donor projects offer the opportunity for a new direction.
The Appraisal Format consists of detailed instructions and Excel spreadsheets to guide an experienced microfinance analyst through a qualitative, institutional evaluation of a relatively mature MFI. The Appraisal Format evaluation process covers the core components of a final evaluation report. The executive summary has quantitative and qualitative reviews of key -conclusions and recommendations. Individual sections are devoted to institutional factors, MFI services/clientele/market, strategic objectives, and financial performance, respectively. The handbook1s annex provides additional information on how to calculate theoretical interest yields.
This format is designed to gather information and assess network support organizations for both comprehensive appraisals and "mini" evaluations. It has a number of possible applications, ranging from appraisals for funding decisions to internal NSO self-assessments. It is currently undergoing testing, and results of the testing will be incorporated into the final document.
(Originally published under the title: "Building Inclusive Financial Systems: Donor Guidelines on Good Practice Microfinance", December 2004)
The Good Practice Guidelines for Funders of Microfinance provide practical guidance for donor staff on how to best interact with, and support, the various actors in microfinance. Through a highly participatory process, including comments from 20 CGAP member donors and 10 other civil society organizations and individuals, the authors sought to balance all views in updating the Good Practice Guidelines.
Donors support many community-managed loan funds (CMLFs) often designed as components of larger projects. Unlike microfinance institutions (MFIs) with professional staff, CMLFs rely on group members themselves to manage the funds. CMLFs can be attractive alternatives for areas and populations that are too expensive for formal MFIs to reach. Savings-based models have experienced promising results, but funding CMLFs with external capital at the outset almost always leads to poor repayment rates and fund failure.
Across the world, new measures are being
introduced to combat money laundering and the financing of terrorism. Once the concern primarily of banks, governments have expanded regulations and requirements for compliance since the late 1990s. Now all financial service providers, including those working with lowincome communities, are--or will--be affected.1 As a result, the new international framework and national measures for anti-money laundering (AML) and combating the financing of terrorism (CFT) could have far-reaching effects.
This Focus Note reviews some of the findings of CGAP's evaluations of the World Bank and UNDP microcredit projects. The evaluations reveal serious problems, but also highlight promising corrective measures.
Experience has shown that funding agencies' microfinance interventions produce better results when design, reporting, and monitoring focus explicitly on key measures of performance. This note, written by Richard Rosenberg for staff who design or monitor projects that fund microfinance institutions (MFIs), offers basic tools to measure performance of microfinance institutions (MFIs).
Much-needed donor funds poured into Sri Lanka following the tsunami. Yet, managing this money well and with a long-term sustainable perspective has proved difficult. CGAP's latest CLEAR takes a close look at the effectiveness of funding agencies, including public donors, international NGOs, and private investors, in this difficult environment. The report analyzes findings from the CLEAR's interviews with over 200 people in Sri Lanka in October 2005, including government representatives, practitioners, and donor staff. It also offers recommendations for how donors can address gaps in the financial system more effectively.
The Madagascar Country-Level Effectiveness and Accountability Review took place in Antananarivo from April 26 to May 17, 2005, and included interviews with over 115 representatives from the government, donor community, microfinance/financial sector, and the private sector. While poor people's access to financial services has grown rapidly (246 percent growth in the number of depositors from 1999-2004), most microfinance providers remain fragile and are still far from reaching sustainability. The Madagascar country review provides recommendations to donors on how they can strengthen inclusive financial systems through increased aid effectiveness.
A CLEAR took place in Nicaragua from February 14 to March 4, 2005 and included interviews with 140 people representing a broad cross-section of stakeholders, from government officials to microfinance institution (MFI) managers and staff along with representatives of the full spectrum of donor agencies and donor microfinance projects. Donors have contributed to the emergence of microfinance in Nicaragua, but their uncoordinated funding fragmented the financial system on all three levels (micro, meso, macro). The Nicaragua country review analyzes the main gaps in the financial system, and provides recommendations to donors on how they can better adapt their support to fill these gaps and improve their effectiveness in Nicaragua.
Savings and credit cooperatives provide financial services to millions, including poor and low-income people in many countries. Thus, donors who want to increase access to financial services, especially savings, often support savings and credit cooperatives. Working with these cooperatives offers many advantages, but, to be effective, donors must learn how to overcome several unique challenges.The latest Donor Brief Working with Savings & Credit Cooperatives provides guidance on how to address these challenges.
Retail financial institutions remain the backbone of financial systems that serve low-income clients. They need complex skills to offer poor people quality financial services on a permanent basis. In most countries, inadequate retail capacity is the main bottleneck to scaling up microfinance. This brief addresses how funding agencies - public donors, international NGOs, private foundations, and investors - can help meet the challenge of developing retail capacity.
MFI portfolio reviews are critical for management, as well as regulators and the growing number of commercial investors in microfinance. External audits, ratings, and evaluations generally fail to accurately quantify the primary risk facing investors?misrepresentation of microcredit portfolio quality. This loan portfolio review tool evaluates the accuracy of reported levels of repayment and the extent to which the MFI employs sound loan management practices. It has three, gradually deepening, levels of review that give increasing degrees of certainty about the quality of loan portfolios, regardless of how they are reported. It is flexible enough for different uses and requirements for confidence in reported loan portfolio quality, and does not require specialized audit or financial analysis skills.
These guidelines embody the working consensus of CGAP donor members on how donors can support deposit services in microfinance. The paper examines what the poor seek from savings and other deposit services, and analyzes the potential of different financial institutions to offer these services. It reviews the financial and institutional capacity requirements needed, such as operating environments, costs and pricing, market orientation, and the depth of outreach of a deposit services provider are examined.
As the communities affected by the recent devastating tsunami begin to rebuild their lives, microfinance institutions (MFIs) can play a powerful part in the path to recovery. The following guidelines are intended to help MFIs provide the appropriate range of emergency and longer-term assistance to their clients, while helping both MFIs and donors ensure that the ultimate mission of the MFI--to be a sustainable provider of financial services--is not compromised.
Five core elements of effectiveness-- strategic clarity and coherence, strong staff capacity, accountability for results, relevant knowledge management, and appropriate instruments--are key for development assistance agencies and other funders to improve how they support financial systems for the poor, and identify their comparative advantage and best level of engagement.
A Country-Level Effectiveness and Accountability Review took place in Cambodia from October 3 to 24, and included interviews with over 110 people representing a broad cross-section of stakeholders, from government officials to microfinance institution (MFI) managers and staff to representatives of the full spectrum of donor agencies and donor microfinance projects. The study reveals that donors have achieved considerable success in building commercially oriented microfinance in Cambodia and formulates some recommendations to donors on how they can continue to support inclusive financial systems through increased aid effectiveness, applying the guiding principles of microfinance, investing in staff training, and continuing to use performance based management
(adapted from Elizabeth Littlefield and Richard Rosenberg, "Microfinance and the Poor: Breaking Down the Walls between Microfinance and Formal Finance," Finance & Development 41, no. 2 (June 2004): 38-40)
There is a dawning understanding that developing countries' financial systems need to be more accessible to poor people and that there are practical ways to make this happen. All kinds of financial institutions--regulators, mainstream rating agencies, commercial and state banks, insurance companies, and credit bureaus--are starting to play a part in developing sound, inclusive financial systems that serve the majority of poor countries citizens.
By applying good microfinance practice to housing finance, a range of financial institutions are beginning to offer much-needed housing finance services to low-income people. This brief outlines how donors can support these institutions and expand sustainable housing finance.
Understanding the limited but constructive role governments can play in building financial systems is key to ensuring poor people's permanent access to quality financial services. Experienced donors can support governments to develop sound policy frameworks and encourage vibrant and competitive microfinance, rather than directly providing financial services.
This CGAP analysis of the distinguishing features of 33 microfinance support organizations differentiates their roles and identifies broad trends that characterize their organization and activities. This Note also offers a list of questions to guide donors when appraising networks for potential funding.
The Disclosure Guidelines represent the consensus of CGAP's 28 member donors on MFI financial reporting requirements. The guidelines do not prescribe accounting policies or any particular format for financial reporting. Rather, they indicate the minimum information that should be included in MFI financial reports, regardless of how that information is presented. It reflects revisions based on field testing, which concluded in 2002.
Because sustainable microfinance is a key element in creating solid financial markets in developing countries, CGAP's donor members developed and endorsed these Key Principles of Microfinance. The G8 also endorsed these principles at their June 2004 Summit in Sea Island, Georgia, USA, as part of their commitment to expanding the access of microfinance.
These cases (prepared for the international conference in Shanghai, May 2004) represent powerful examples of scaling up microfinance. These diverse institutions made conscious decisions to pursue scale while serving poor clienteles, demonstrating creativity and a willingness to take risk, while operating under commercial business principles.
Interest rate ceilings imposed by governments to protect poor people unfortunately often have the opposite effect. Customers do need protection from predatory lending practices and this brief offers other options governments and donors can employ.
This donor brief builds on the experience of several donor agencies that have long applied a financial-systems approach in their microfinance operations. It outlines a practical way that donors can work, individually or on collaboration, to support pro-poor financial systems that ensure permanent access to financial services for significant numbers of poor people.
Microinsurance is one of the many financial services that can help poor people protect themselves from risk. Understanding the numerous informal and formal strategies employed by poor people to prepare for and cope with risk can help determine whether insurance is an appropriate response. This introductory brief provides practical dos and don'ts for donors interested in supporting this promising but still largely untested field.
Ensuring that poor people in rural areas have access to quality, permanent financial services remains a tremendous challenge for donor agencies. This introductory brief clarifies the confusing terminology related to rural finance and identifies the main constraints to financial services in rural areas. The brief also pinpoints specific issues donor agencies face internally to effectively support financial services for the rural poor, and offers helpful guidance.
Financial services provide just one way to help affected households deal with the economic ravages of HIV/AIDS. This brief cautions against launching financial interventions specifically targeted to persons with AIDS. It also offers tips for how donors can support financial institutions operating in heavily affected areas and suggestions for creative linkages with specialized providers of health and insurance services.
Donors want to ensure a social return on their investment. This brief summarizes evidence about the impact of microfinance on the multiple dimensions of poverty, including income growth, social improvements in health and education, and empowerment. Microfinance could achieve greater impact if it offered a broader range of financial services that better met the varied needs of the poor, including deposit services, microinsurance, and transfer payments.
This simple and clear summary of the increasingly complex issues in microfinance regulation and supervision includes definitions of key terms, clear guidelines, and options for donor action.
Over the next decade, microfinance will either realize its vast potential for improving the lives of large numbers of the poor-or it will remain an unfulfilled promise. This brief summarizes the vision and strategy of the CGAP member donors to bring microfinance to the scale required to serve millions worldwide.
Many multi-sectoral projects have credit components that provide the target group with financial services for the life of the project, and thus miss the opportunity to build long-term financial services and often undermining its achievement. The ways to grasp this opportunity and/or prevent negative outcomes are outlined here.
The eradication of extreme poverty and hunger, education, women's empowerment and the other Millenium Development Goals are rightly the focus of donors and governments. This brief gives the evidence for how microfinance can play an important part in achieving these goals.
Product development in microfinance makes a lot of sense because clients obviously need more than one type of loan or service. MFIs often ask for support to expand their product line, but developing products is not a simple undertaking. Donors who want to make the best use of funds for product development will find these guidelines useful.
Knowing and understanding the components that contribute to "transparency" in microfinance is half of the battle. It is also particularly useful to know, with just a few strategic changes, how donor reports can enhance transparency for the whole microfinance sector.
Why do microfinance institutions (MFIs) charge such high interest rates to the poor? This brief gives donors a quick reference to use when answering questions about the seemingly high microcredit interest rates. It also explains how donors can tell if an MFI's rates are too high and suggests what to do.
Most apex institutions have a dubious track record. This brief explains how donors can recognize a good apex institution and then support it, thus avoiding common donor mistakes with apexes.
Savings really are as important as credit for people with a minimal income. It's the only way to pay for anything other than daily needs. Donors need to know, therefore, how to support deposit services that help poor people improve their lives.
For "water" in this title read donor funds for microfinance institutions (MFIs). Strong (MFIs) have an over supply of donor funds, it seems money is everywhere. But many smaller promising microfinance MFIs cannot get the funds they need to grow. This brief explains how donor funding can become more effective.
Microcredit is just one of many strategies that can alleviate poverty, generate income and promote employment. This brief outlines for donors when microcredit will be successful, when it is inappropriate and what alternative interventions can be used to strengthen the livelihoods of the poor.
Armed with these twelve questions and answers, every donor with a project that includes credit will be able to introduce sound practice into the project and increase its chances of success.
This case study describes how donors successfully supported MFI product development. Initiated by Swisscontact (a nongovernmental organization), led by Micro-Save Africa (a donor-funded project providing product development services), and supported by DFID, EU, UNDP, and AfriCap, Equity Building Society's product development capacity has grown rapidly.
This case study describes how 15 very different donor agencies worked in concert with local microfinance institutions (MFIs) to develop a joint reporting format in Uganda.
This case study details a successful microfinance apex fund that was designed and managed by the World Bank with bilateral donor support from Italy, Switzerland, the Netherlands, and Japan.
This case study explains how donor flexibility enabled an MFI to secure the mix of capital required for long-term growth. The flexibility of donors such as the Swiss Agency for Development and Cooperation (SDC), the Ford Foundation, and the Canadian International Development Agency (CIDA) allowed BASIX, an innovative new Indian MFI, to build a diverse and reliable funding base.
In 2002 UNDP Bangladesh closed down the microfinance components of its empowerment projects. This action showed rare courage and good donor practice in an advanced microfinance market.
Despite an initial reluctance to undertake a microfinance program within a large state bank, the World Bank chose to take a chance on an apparently risky endeavor. The risk paid off. This case study tells the story of how it happened.
A case study of USAID support to the microfinance sector in Haiti, 1995 - present. The story of a donor that recognized opportunity, was flexible, took risks, and invested the time and resources needed to build a microfinance industry.
German Technical Cooperation (GTZ) enabled the Bank for Agriculture and Agricultural Cooperatives in Thailand to realize the potential of rural poor Thais to save. Innovative marketing strategies, including prize drawings and parties, have been highly successful in encouraging saving.
This report draws on findings from the first sets of peer reviews. The reviews identify success factors and constraints to good practices in microfinance and provide concrete recommendations for each donor agency reviewed.
The paper reviews the experience of national microfinance apexes--wholesale mechanisms that channel funds, with or without supporting technical services, to retail microfinance institutions (MFIs) in a single country or integrated market.
This note highlights how international financial institutions can serve as catalysts in the development of microfinance retail capacity. Tthe World Bankemployed a patient, phased support to Brazil's Banco do Nordeste as it designed, launched, and nurtured its CrediAmigo microfinance program. Its early progress suggests useful lessons for microfinance donors.
Aimed primarily at donors and policymakers considering microcredit as a poverty alleviation response, funders are encouraged to select a package of tools that is likely to work best in a specific situation. The authors argue that effective poverty alleviation may require linkages among specialized institutions and multiple intervention programs.
Donor staff-at headquarters and in the field-need to become more aware that donor coordination in microfinance is good practice and should be encouraged. It is particularly effective as an incentive for MFIs and in communicating messages to host governments. There are different levels of existing donor coordination, and successful cases of in-country coordination are often critically dependent on motivated individuals (often as few as two or three).
Definition and discussion of some of terms that are often inconsistently used in the collection, analysis, and disclosure of MFI financial information. The glossary is part of a trio of CGAP publications on financial transparency that includes Focus Note No. 22 Resource for Microfinance Assessments, and the CGAP brochure, Focus on Transparency: Building the Infrastructure for a Microfinance Industry .
This paper discusses a wide range of issues concerning regulation of microfinance and presents a range of alternative mechanisms for supervision. Although the authors contend the future of microfinance lies in a licensed setting, they urge caution with respect to the timing of regulation and expectations of its impact. While motivations for regulating micro-finance are varied, the authors argue that the costs are generally underestimated and the benefits overestimated.
The Poverty Assessment Tool (PAT) was developed for CGAP by the International Food Policy Research Institute. The multi-dimensional Poverty Index constructed by the tool is targeted at donors and investors who require a standardized, globally applicable set of poverty indicators to make poverty-focused funding decisions and to compare MFIs across regions and countries. Although it is more complex and costly than the simpler client-targeting tools used by MFIs (such as means testing, the Housing Index, Participatory Wealth Ranking, Rapid Appraisals, and Participatory Appraisals), and less comprehensive (and therefore less costly) than the World Bank1s Household Expenditure Survey, the PAT nonetheless yields rigorous data that can also be used to rank large populations, determine the poorest inhabitants of large geographical regions, and make valid comparisons across regions and countries.
This is a snapshot in 1998 of how microfinance fits into the agency structures of CGAP member donors, including the country or geographic priorities of each agency, the instruments (grants, loans, equity, etc.) they provided to MFIs, and the procedures to request support from each agency.
How best can one support an MFI that has a track record of extending quality financial services to significant numbers of poor people on a progressively financially sustainable basis? Using examples of CGAP funding, the paper outlines an approach based on mutual accountability, institutional performance, and shared risk.
This first note was written by the Social Protection Anchor (based on studies of social funds that had incorporated microfinance), with significant review inputs by CGAP and FSE, and is a highly practical distillation of lessons learnt and recommendations for the use of microfinance in this type of multi-sectoral project.
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